Money isn’t everything, but it sure is important. While you don’t need money to be happy, you’ll certainly be more comfortable if your finances are in order. As a dad with kids, imparting the right financial lessons and principles from a young age will provide them with a significant advantage in life.
The Shocking State of Financial Literacy in the U.S.
The need for giving your children financial education in the home is only intensified when you study the state of financial literacy in the United States today. Consider that:
- 53 percent of American adults get anxious when they think about money, with those between the ages of 18 and 34 having the highest levels of financial stress (63 percent) and anxiety (55 percent).
- 78 percent of adults live paycheck to paycheck. Many of these individuals make significant salaries, but all of their income is accounted for in the form of debt and frivolous expenses.
- Just 40 percent of Americans keep a budget. The other 60 percent don’t actively track their monthly income or expenses.
- Just one in five youths can pass a basic financial literacy quiz.
- Fewer than 20 percent of American adults are confident they have enough savings set aside to keep them afloat in a short-term emergency situation.
There are dozens of other statistics just like these. However, you get the idea. Young people aren’t being educated around money topics and it’s negatively impacting their financial literacy and decision making when they enter into adulthood. Fixing this problem starts at home.
How to Raise Financially Savvy Children
There are multiple ways to teach a child smart money principles. However, if you want to give them a solid foundation, it begins with doing the following:
1. Explain the Value of a Dollar
At the heart of smart money management is the understanding of the value of a dollar. If a child doesn’t grasp this elementary concept, nothing else will make sense. And while most parents wait until a child is seven, eight, or nine years old to teach them the value of a dollar, you can actually begin much younger – possibly as early as ages four or five.
One of the best ways to teach a child the value of money is to carry cash with you when you go to a store. Then physically spend this money in the checkout line. Explain that you have to work for each of these dollars and that they can be exchanged for items in the store. Once they’re gone, you have to go to work to earn more. As they get older, they’ll understand the relationship between time, money, and what money can buy.
2. Give Commissions, Not Allowances
Please don’t give your child an allowance. An allowance is basically a handout that your child gets each week/month with no strings attached. Unfortunately, this does nothing to instill the importance of hard work. It also sends the message that they can get paid without having to do anything in return (which devalues the dollar in their mind).
Instead of allowances, we recommend giving out commissions. A commission is money a child earns based on chores and tasks they do around the house. If they work more, they earn more. If they don’t work, they don’t get anything. This is a more accurate reflection of the way the world works.
3. Nurture Their Entrepreneurial Side
Children are naturally creative and daring. Unfortunately, parents often squash these characteristics by only encouraging their kids to do things that are sensible or realistic. But if you want to give your child a financial head start, nurture their entrepreneurial side.
For example, if you own rental property investments, give them a cut of the monthly cash flow in exchange for doing things like cleaning windows, collecting rent, or doing basic accounting. Turn them into your own little property manager and show them the ropes.
4. Teach Kids to Budget
Budgeting is one of the most important financial concepts there is. Because in order for someone to be successful with their money, they must be able to track income and expenses. Everything else, including saving, investing, and giving, depends on the ability to budget.
There are numerous age-appropriate ways to teach a child to budget. However, the best way is to set up envelopes labeled “save,”, “spend,” and “give.” Each time your child receives their “commission” money, have them evenly distribute it across these three categories. As they get older, you can work with them to come up with more specific ratios (such as 50 percent save, 40 percent spend, and 10 percent give).
Give Your Kids a Head Start in Life
At the end of the day, your children are watching you. The best thing you can possibly do is lead by example. If you’re encouraging them to work hard, save money, and avoid frivolous purchases, make sure you’re abiding by these same principles. They’ll learn far more from watching you than from listening to you.
If you can equip your children with basic financial skills before they grow up and leave the house, you’ll give them a massive advantage over their peers. Not only will they be likely to earn more over their lifetime, but they’ll also be able to avoid dumb mistakes that hold so many young adults back in their 20s and 30s.
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This post is brought to you by Larry Alton.
This post is republished by “Agents of Change” in the publication “A Parent Is Born” on Medium.
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